COMMONWEALTH OF MASSACHUSETTS
APPELLATE TAX BOARD
MILLBROOK PROPERTIES v.BOARD OF ASSESSORS OF
MANAGEMENT, LLCTHE CITY OF WORCESTER
Docket Nos.: F318275 (2012)
F319043 (2013)
F322823 (2014) Promulgated:
March 29, 2017
These are appeals filed under the formal procedure, pursuant to G.L. c. 58A, § 7 and G.L. c. 59, §§ 64 and 65, from the refusal of the Board of Assessors of the City of Worcester (“appellee” or “assessors”) to abate taxes on certain real estate in Worcester, owned by and assessed to Millbrook Properties Management, LLC (“appellant”) under G.L. c. 59, §§11 and 38, for fiscal years2012, 2013, and 2014 (“fiscal years at issue”).
Commissioner Chmielinski heard theses appeals. Chairman Hammond and Commissioners Scharaffa, Rose,and Good joined him in the revised decision for the appellant in Docket No. F318275 (FY 2012), which is promulgated herewith, and for the appellee in Docket Nos. F319043 (FY 2013) and F322823 (FY 2014).
These findings of fact and report are made pursuant requests by both parties under G.L. c. 58A, §13 and 831 CMR 1.32.
Matthew A. Luz, Esq. for the appellant.
John F. O’Day, Jr., Assistant City Solicitor,for the appellee.
Findings of Fact and Report
I. Jurisdiction and Description
On the basis of all the evidence, including the testimony and documentary exhibits entered into the record, the Appellate Tax Board (“Board”) found the following.
On January 1, 2011, January 1, 2012, and January 1, 2013,the relevant valuation and assessments dates for the fiscal years at issue, the appellant was the assessed owner of an irregularly-shaped 2.78-acre parcel of land improved with an industrial-use building located at 57 Millbrook Street in Worcester (“subject property”). The subject property is identified on the assessors Map 13 as Block 25A, Parcel 11.
The assessors valued the subject property and assessed property taxes for the fiscal years at issue as follows:
FiscalYear / Assessed
Value / Tax Rate
Per $1,000 / Tax
Assessed
2012 / $2,918,700 / $29.07 / $84,846.61
2013 / $2,918,700 / $30.85 / $90,041.90
2014 / $2,710,300 / $30.83 / $83,558.55
In accordance with G. L. c. 59, § 57C, the appellant timely paid the taxes due without incurring interest and, in accordance with G. L. c. 59, § 59, timely filed Applications for Abatement for thefiscal yearsat issue. The appellee denied the applications, and, in accordance with G. L. c. 59, §§ 64 and 65, the appellant seasonably appealed the denials to the Board. The relevant dates relating to the Board's jurisdiction are set forth in the following table.
FiscalYear / Tax Bills
Mailed / Abatement
Application
Filed / Abatement
Denied / Appeal
Filed
2012 / 5/22/2012 / 6/22/2012 / 9/20/2012 / 10/15/2012
2013 / 12/31/2012 / 1/07/2013 / 4/01/2013 / 4/25/2013
2014 / 12/31/2013 / 1/28/2014 / 4/28/2014 / 5/12/2014
On the basis of these facts, the Board found and ruled that it had jurisdiction to hear and decide these appeals.
The subject property is improved with an 86,886-square-foot industrial building (“subject building”). The subject property is situated in the northeastern section of Worcester within a mixed-use area that is bordered by Interstate 190 to the northeast, Interstate 290 to the east, and Route 12 to the west. The subject property is situated along Millbrook Street, a moderately traveled roadway.
The subject building, constructed in 1910, has a steel-frame structure with a concrete foundation and a flat roof with a partial rubber and a partial tar and gravel covering. The exterior is a mix of brick, wood, and concrete block. The subject building is designed for industrial use, with ancillary office space, by multiple tenants. Interior finishes include: walls - painted plaster in the office areas and a mix of concrete block, particle board, and plywood in the industrial space; ceilings - suspended acoustic tiles in the office space and concrete, exposed brick, or exposed wood in the industrial areas; and flooring – carpet, marble tile, or laminate in the office areas, and concrete, plywood, quarry tile, or vinyl tile in the industrial areas. Access to the second floor is provided by two interior staircases; in addition, there are two freight elevators. The building has 19 overhead doors with tailboard access. There is paved on-site parking for approximately 50 vehicles. According to the subject property’s property record cards, the subject building is in overall average condition.
II. Appellant’s Evidence
The appellant presented its case-in-chief through the testimony and appraisal report of Eric Wolff, whom the Board qualified as an expert in the area of real estate valuation. To develop a value for the subject property for the fiscal years at issue, Mr. Wolff first examined the subject property’s highest-and-best use and concluded that it was its current use as an industrial-use building with related or ancillary office space. Mr. Wolff then considered the three usual methods for estimating the value of the subject property for the fiscal years at issue. He rejected both the cost andsales-comparison approaches and instead relied on the income-capitalization approach to estimate the faircash value of the subject property for the fiscal years at issue because it was an income-producing property.[1]
To determine what he considered to be the most appropriate rent to use in his income-capitalization methodology for the fiscal years at issue, Mr. Wolff analyzed the subject property’s relevant rent rolls and also investigated market rental rates by surveying what he regarded as similar properties. According to the subject property’s lease data provided by the owner, the subject property’s average rents for the fiscal years at issue, excluding the space occupied by an affiliate of the owner, was $3.02 per square foot for fiscal year 2012, $2.62 per square foot for fiscal year 2013,[2] and $3.23 per square foot for fiscal year 2014. Mr. Wolff also conducted a survey of 10 purportedly comparable industrial-use spaces located in Worcester. These properties ranged in size from 8,437 square feet to 60,037 square feet with rental rates that ranged from $2.71 to $4.50 per square foot.
Based on this information, together with the subject property’s location, size and overall condition, Mr. Wolff estimated an economic rent of $3.00 per square foot on a triple-net basis. Applying this rate to the subject property’s net rentable area of 90,879 square feet, which included basement space of 3,993 square feet, Mr.Wolff obtained a potential gross income of $272,637, which he considered to be a stabilized rent for the fiscal years at issue.
For vacancy and collection loss, Mr. Wolff testified that he consulted with local brokers who reported that vacancy rates for industrial space in Worcester during the relevant time period ranged between 10% and 15%. He further testified that market surveys conducted by CoStar during the relevant time period indicated that the vacancy rate for industrial space in the Worcester area was between 12.3% and 13%. For purposes of the subject property, Mr. Wolff selected a vacancy rate of 10% for the fiscal years at issue. This allowance resulted in an effective gross income of $245,373 for the fiscal years at issue.
Next, Mr. Wolff determined the subject property's net-operating income by deducting from the effective gross income the subject property's estimated operating expenses. Mr. Wolff noted that within the subject property's competitive market area, the tenants were responsible for all operating expenses, excluding those associated with the management and structural maintenance of the building. Consequently, Mr. Wolff adopted a management fee equal to 5% of the effective gross income, a replacement reserve allowance equal to $0.15 per square foot, and also a leasing commission expense equal to 1% of the potential gross income, which he testified were typical in the market. Mr. Wolff deducted these expenses from his effective gross income to derive a stabilizednet-operating income of $216,746 for the fiscal years at issue.
Finally, Mr. Wolff determined a capitalization rate for each of the fiscal years at issue. Mr. Wolff developed his capitalization rates using a band-of-investment technique. For fiscal year 2012, Mr.Wolff assumed a mortgage-to-equity ratio of 75% to 25%, with a 7.55% interest rate and a 12.5% equity capitalization rate, resulting in a capitalization rate of 9%. Applying the 9% capitalization rate to the $216,746 net operating income resulted in an estimated rounded value for the subject property of $2,410,000 for fiscal year 2012.
For fiscal year 2013, Mr. Wolff assumed a mortgage-to-equity ratio of 75% to 25%, with a 6.67% interest rate and a 12% equity capitalization rate, resulting in a capitalization rate of 8%. Applying the 8.00% capitalization rate to the $216,746 net operating income resulted in an estimated rounded value for the subject property of $2,710,000 for fiscal year 2013.
For fiscal year 2014, Mr. Wolff once again assumed a mortgage-to-equity ratio of 75% to 25%, with a 6.67% interest rate and a 14.00% equity capitalization rate, resulting in a capitalization rate of 8.50%. Applying the 8.50% capitalization rate to the $216,746 net operating income resulted in an estimated rounded value for the subject property of $2,550,000 for fiscal year 2014. For all of the fiscal years at issue, Mr.Wolff reported that he also consulted the relevant rates published by national surveys, such as RealtyRates.com Investor Surveys, Korpacz Reports, CB Richard Ellis Cap Rate Surveys, andReal Estate Research Corporation.
Mr. Wolff’s income-capitalization analyses are reproduced in the following table.
Mr. Wolff’s Income-Capitalization Analyses
INCOMEOffice Space 90,879 square feet @ $3.00 psf
Potential Gross Income (“PGI”): $ 272,637
Vacancy & Collection Allowance (10%): ($ 27,264)
Effective Gross Income (“EGI”): $ 245,373
EXPENSES
Management Fee $ 12,269 @ 5% of EGI
Replacement Reserves $ 13,632 @ $0.15 psf
Commissions $ 2,726 @ 1% of PGI
Total Expenses: ($ 28,627)
Net Operating Income (“NOI”): $ 216,746
Divide by: Capitalization Rate for Fiscal Year 2012 – 9.00%
Indicated Value for Fiscal Year 2012 $2,408,289
Rounded Value for Fiscal Year 2012 $2,410,000
Divide by: Capitalization Rate for Fiscal Year 2013 – 8.00%
Indicated Value for Fiscal Year 2013 $2,709,325
Rounded Value for Fiscal Year 2013 $2,710,000
Divide by: Capitalization Rate for Fiscal Year 2014 – 8.50%
Indicated Value for Fiscal Year 2014 $2,549,953
Rounded Value for Fiscal Year 2014 $2,550,000
III. Appellee’s Evidence
In defense of their assessments, the assessors relied primarily on their cross-examination of Mr. Wolff, but they also offered the testimony of William Ford, City Assessor, and introduced several exhibits, including: the requisite jurisdictional documentation, the subject property’s property record cards and income valuation cards for the fiscal years at issue, and the appellant’s responses to the assessors’ G.L.c.59, § 38D requests (“§ 38D requests”) for fiscal years 2013 and 2014. Mr. Ford testified that the data included in the assessors’ income-capitalization methodology was based on information collected by the assessors pursuant to their § 38D requests and also consideration of the subject property’s actual use, size, and location. A summary of the assessors’ income-capitalization methodology for the fiscal years at issue is shown in the following tables.[3]
Assessors’ Income-Capitalization Methodology – FY 2012 & FY 2013
INCOMEDistrib Wrhs 33,473 square feet @ $7.00 / $234,311
Loft Light[4] 53,413 square feet @ $4.25 / $227,005
PGI: / $461,316
Vacancy (25.2%) / ($116,251)
EGI: / $345,065
Expenses
Distrib Wrhs (13% of Whrs EGI) / $ 23,135
Loft Light (17% of Loft EGI) / $ 28,017
Total Expenses: / ($51,152)
NOI: / $293,913
Capitalization Rate / 10.07%
Value Estimate / $2,918,699
Rounded / $2,918,700
Assessors’ Income-Capitalization Methodolgy – FY 2014
INCOMEDistrib Wrhs 33,473 square feet @ $6.75 / $225,943
Loft Light 53,413 square feet @ $3.75 / $200,299
PGI: / $426,242
Vacancy
Distrib Wrhs (29.4%) / $66,427
Loft Light (19.6%) / $39,259 / ($105,686)
EGI: / $320,556
Expenses
Distrib Wrhs (13% of Whrs EGI) / $ 21,056
Loft Light (17% of Loft EGI) / $ 26,572
Total Expenses: / ($47,628)
NOI: / $272,928
Capitalization Rate / 10.07%
Value Estimate / $2,710,308
Rounded / $2,710,300
IV. Board’s Ultimate Findings
Based on all of the evidence, the Board found that the appellant met its burden of proving that the subject property was overvalued for fiscal year 2012, but not for fiscal years 2013 and 2014. The Board determined that the highest-and-best use of the subject property was, as Mr. Wolff proposed, its continued use as an industrial property with some related or ancillary office space and also agreed with the parties that the income-capitalization methodology was the best approach to use to value the income-producing subject property for the fiscal years at issue.
To determine the subject property’s income, the Board agreed with both the assessors and Mr. Wolff that the subject property’s rentable area was 86,886 square feet.[5] The Board agreed with Mr. Wolff that the subject property’s market rent should be one consolidated rate, as opposed to a bifurcated - industrial and office – rate, as suggested by the assessors. The Board found, however, that Mr. Wolff’s suggested rental rate of $3.00 per square foot was at the lower end of the range of his purportedly comparable properties and instead, given the undisputed favorable location and average condition of the subject property, selected an average market rent of $3.75 per square foot for fiscal years 2012 and 2013, and an average market rent of $3.50 per square foot for fiscal year 2014. The Board also adopted Mr. Wolff’s vacancy rate of 10%, which in the Board’s view best reflected the subject property’s market.
For expenses, the Board recognized that under the triple-net leasing scenario that it adopted, the tenant pays, or reimburses the landlord, for most operating expenses associated with the building. Accordingly, the Board agreed with Mr.Wolff’s approach regarding expenses and adopted his recommendations for a management fee equivalent to 5% of effective gross income and a leasing commission expense calculated at 1% of effective gross income.[6] The Board further found that Mr. Wolff’s replacement for reserves, which he calculated on a per-square-foot basis and was equivalent to 5% of the subject property’s potential gross income, was more properly calculated at 3% of the subject property’s potential gross income.[7]
As for the capitalization rates, the Board found that Mr.Wolff’s pre-tax factor capitalization rates of 9% and 8.5% for fiscal years 2012 and 2014, respectively, were appropriate. The Board further found, however, that Mr. Wolff’s pre-tax factor capitalization rate of 8% for fiscal year 2013 was too low and, instead, chose a rate of 8.5% based on the evidence of record. As a final step in the Board’s determination of capitalization rates, the applicable pro-rated tax factor to account for vacancy for each of the fiscal years at issue was added to the base capitalization rates resulting in overall capitalization rates of 9.2907%, 8.8085%, and 8.8083% for fiscal years 2012, 2013, and 2014, respectively.
The Board’s income-capitalization analyses are contained in the following tables.
Board’s Income-Capitalization Analysis – FY 2012 & FY 2013
IncomeBuilding Square Footage 86,886
Market Rent $3.75 psf
PGI: $ 325,823
Less: Vacancy & Collection Allowance – 10% / ($ 32,582)
EGI: $ 293,241
EXPENSES
Management Fee 5% of EGI $14,662
Replacement Reserves 3% of PGI $ 9,775
Commissions 1% of EGI $ 2,932
Total Expenses: ($ 27,369)
NOI: $ 265,872
Divide by Total Capitalization Rate for Fiscal Year 2012:
Capitalization Rate 9.0000%
Tax Factor 0.2907%
Total Capitalization Rate 9.2907%
Indicated Value for Fiscal Year 2012 $2,861,700
Rounded Value for Fiscal Year 2012 $2,862,000
Divide by Total Capitalization Rate for Fiscal Year 2013:
Capitalization Rate 8.5000%
Tax Factor 0.3083%
Total Capitalization Rate 8.8083%
Indicated Value for Fiscal Year 2013 $3,018,426
Rounded Value for Fiscal Year 2013 $3,018,400
Board’s Income-Capitalization Analysis – FY 2014
IncomeBuilding Square Footage 86,886
Market Rent $3.50 psf
PGI : $ 304,101
Less: Vacancy & Collection Allowance – 10% / ($ 30,410)
EGI: $ 273,691
EXPENSES
Management Fee 5% of EGI $13,685
Replacement Reserves 3% of PGI $ 9,123
Commissions 1% of EGI $ 2,737
Total Expenses: ($ 25,545)
Net-Operating Income: $ 248,146
Divide by Total Capitalization Rate for Fiscal Year 2014:
Capitalization Rate 8.5000%
Tax Factor 0.3083%
Total Capitalization Rate 8.8083%
Indicated Value for Fiscal Year 2014 $2,817,184
Rounded Value for Fiscal Year 2014 $2,817,200
On this basis, the Board found that the subject property was overvalued by $56,700 for fiscal year 2012 and therefore issued a revised decision for the appellant, which is promulgated herewith, and ordered abatement in the amount of $1,648.27 in Docket No. F318275. The Board further found that the subject property was not overvalued for fiscal years 2013 and 2014 and therefore issued a decision for the appellee in Docket No. F319043 and Docket No. F322823.
OPINION
The assessors are required to assess real estate at its fair cash value. G.L. c. 59, § 38. Fair cash value is defined as the price on which a willing seller and a willing buyer in a free and open market will agree if both of them are fully informed and under no compulsion. Boston Gas Co. v. Assessors of Boston, 334 Mass. 549, 566 (1956).
The appellant has the burden of proving that the property has a lower value than that assessed. “‘The burden of proof is upon the petitioner to make out its right as [a] matter of law to [an] abatement of the tax.’” Schlaiker v. Assessors of Great Barrington, 365 Mass. 243, 245 (1974) (quoting Judson Freight Forwarding Co. v. Commonwealth, 242Mass. 47, 55 (1922)). “[T]he board is entitled to ‘presume that the valuation made by the assessors [is] valid unless the taxpayers . . . prov[e] the contrary.’” General Electric Co. v. Assessors of Lynn, 393Mass. 591, 598 (1984) (quoting Schlaiker, 365 Mass. at 245).
In determining fair cash value, all uses to which the property was or could reasonably be adapted on the relevant assessment dates should be considered. Irving Saunders Trust v. Assessors of Boston, 26 Mass. App. Ct. 838, 843 (1989). The goal is to ascertain the maximum value of the property for any legitimate and reasonable use. Id. If the property is particularly well-suited for a certain use that is not prohibited, then that use may be reflected in an estimate of its fair market value. Colonial Acres, Inc. v. Assessors of North Reading, 3Mass. App. Ct. 384, 386 (1975). “In determining the property’s highest and best use, consideration should be given to the purpose for which the property is adapted.” Peterson v. Assessors of Boston, Mass. ATB Findings of Fact and Reports 2002-573, 617 (citing Appraisal Institute, The Appraisal of Real Estate 315-316 (12th ed., 2001)), aff’d, 62 Mass. App. Ct. 428 (2004). In the present appeals, the Board found that the highest-and-best use of the subject property during the fiscal years at issue wasits existing use as an industrial warehouse property containing some related or ancillary office space.
Generally, real estate valuation experts, the Massachusetts courts, and this Board rely upon three approaches to determine the fair cash value of property: income capitalization, sales comparison, and cost reproduction. Correia v. New Bedford Redevelopment Authority, 375 Mass. 360, 362 (1978). The use of the income-capitalization approach is appropriate when reliable market-sales data are not available. Assessors of Weymouth v. Tammy Brook Co., 368 Mass. 810, 811 (1975); Assessors of Lynnfield v. New England Oyster House, 362Mass. 696, 701-02 (1972); Assessors of Quincy v. Boston Consolidated Gas Co., 309Mass. 60, 67 (1941). It is also recognized as an appropriate technique to use for valuing income-producing property. Taunton Redevelopment Associates v. Assessors of Taunton, 393 Mass. 293, 295 (1984). In the present appeals, the Board agreed with both parties that the income-capitalization approach was the most appropriate method to value the subject property for the fiscal years at issue.